Visit vanguard.com or contact your broker to obtain a Vanguard ETF or fund prospectus which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in Creation Unit aggregations. Instead, investors must buy or sell Vanguard ETF Shares in the secondary market with the assistance of a stockbroker. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss in a declining market.

Stocks of companies in emerging markets are generally more risky than stocks of companies in developed countries.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.

All investing is subject to risk, including possible loss of principal.

In the early 1990s, I studied for the Chartered Financial Analyst® (CFA®) exams. From March to June, I’d lock the television in the closet and spend my evenings with some of the driest reading material ever committed to the page.

In the mornings, I’d use my bus ride from Irving Park Road to Chicago’s South Loop to read about great investors (John Train’s Money Masters, Roger Lowenstein’s Buffett: The Making of an American Capitalist, Peter Lynch’s One Up on Wall Street). I attended classes in options trading at the Chicago Board of Trade.

It was a new way to see the world. Unlike Warren Buffett, I’d never before looked at the purchase of a dining room set as the agonizing loss of capital that could have compounded for another 20 years.* The reading and classes were related to my job, but I was confident that I’d also reap a big personal benefit. By absorbing the wisdom of leading investment theorists and practitioners, I would be in a better position to reach my own financial goals.

At the margin, that may be true, but the immersion in investments has had less bearing on my personal financial goals than lessons learned when I opened a passbook savings account as a child. If I could offer one piece of advice to new investors, it would have less to do with high finance and more to do with Poor Richard: Save.

From modern finance to Franklin

“C’mon, Andy, is that the best you’ve got? ‘Save’?” Sorry, my internal monologue cut in. But to answer the question, “Yes.”

In one of my favorite Vanguard research papers, Penny saved, penny earned, Maria Bruno and Yan Zilbering illustrate the importance—and power—of saving in a way that’s both illuminating and devoid of the scolding tone that occasionally creeps into articles about diet, exercise, and saving. They treat saving, not as a moral imperative, but as a variable in the equation that determines our financial results.
The researchers simulated the growth of different portfolios using various assumptions about salaries, savings rates, and asset allocations.** The table below is derived from their research. It compares the value of a portfolio produced by an initial retirement plan with the values produced by a plan that makes a change to one of three “levers”:

• Asset allocation.
• Savings rate.
• Savings time horizon.

*Adjusted for inflation, calculated using median historical returns from stocks and bonds. Past performance is no guarantee of future returns. These results are hypothetical and do not represent any particular mutual fund or other investment.

More saving, less risk

The shift to a more aggressive asset allocation produced, on average, a significant increase in wealth, the result of the stock-heavy portfolio’s higher returns. These higher returns weren’t without higher risk, of course. In the worst-case scenarios, this more aggressive allocation produced less wealth than its moderate counterpart.

A change in savings habits, by contrast, turned out to be a strategy for all seasons. Even if an investor retained the moderate asset allocation, an increase in the savings rate or an increase in the number of years of saving led to a bigger gain in portfolio value than the switch to a more aggressive allocation.
The effort to reach our goals is like a partnership between us and the financial markets, and most of us need exposure to the stock market’s potentially higher returns to get the job done. The more we can rely on Ben Franklin’s copybook maxims, however, the less we have to depend on the stock market’s potentially generous but erratic returns.

* Lowenstein, Roger, 1995. Buffett: The Making of an American Capitalist. New York: Random House, p. 87.

** More details about the data and assumptions used in the calculations are provided in the paper.

• All investments are subject to risk, including the possible loss of the money you invest. Investments in bonds and bond funds are subject to interest rate, credit, and inflation risk. Diversification does not ensure a profit or protect against a loss.

Andy Clarke

Andy Clarke helps lead Vanguard's Corporate Communications department.
Before joining Vanguard in 1997, Andy worked at Morningstar as an investment analyst. He is the author of Wealth of Experience, an introduction to investing based on ordinary people's stories about what has—and hasn't—worked as they've tried to meet their investment goals.
Andy holds a B.A. in English from Haverford College and is a CFA charterholder.

Comments

Paul D. | June 6, 2014 1:06 pm

Andy, I enjoy your posts and often learn something new…either in your original post or in subsequent replies by others. One conundrum I can’t explain is the emphasis by many ‘financial journalists’ on their continued assertion that “rising home equity stimulates the economy…by making people feel more comfortable to borrow and spend”. Wouldn’t it be more productive to promote a healthier economy by inducing people to have a ‘save and spend’ mentality? It would appear from my readings of these articles that if the general public stops borrowing and spending, the economy (which seems to be built only on credit) will collapse. I contend that the same amount of discretionary spending could occur if people had already saved the cash they need to spend.

It seems to me that emphasis is being placed upon consumption rather than on saving, which in my mind, sends the wrong message to our youth. I would hope that the ‘wizards of finance’ would someday try a more balanced message about saving and spending but I guess that doesn’t make for ‘good press’. I think it boils down who’s Ox is going to get gored if they did preach good stewardship instead of instant gratification and that’s one of many reasons I so trust Vanguard…always straight answers with no “Ox in the game”.

GARY G. | June 9, 2014 11:18 am

I agree with you 100%. But our schools and colleges are teaching to spend spend spend with the theory that is what improves the economy rather than teaching the compound interest theory. Schools do not teach managing personal finances or investing. Our youth is programmed to think that they have to borrow for everything they want to buy.

Interesting discussion. Our chief economist Joe Davis has touched on this subject before. I’ll briefly synopsize some of what he has said. (Or at least what I’ve heard him say . . . Let’s hope there’s not too much difference.)

For the past few decades, the U.S. has relied heavily on consumer spending to fuel growth. The result, for many of us, has been inadequate savings and a more precarious financial condition. So we should save more. But if we save more and spend less, where will we get the economic growth that creates jobs, raises living standards, etc.?

Joe has talked about the need for a “rebalancing” in the global economy. Some countries like the U.S. have relied too heavily on consumption. Others, such as China, have perhaps not consumed enough. (I’m not sure how you define “enough,” but maybe there are measures of social welfare you could use.) As economies rebalance, the U.S. would generate less of its growth from consumer spending and more from business investment (funded in part by our increased savings) and exports. In China, on the other hand, there might be less growth from exports and more from consumption. Such rebalancing will take time, but there are signs that it is under way, kick-started by the 2007-2008 financial crisis.

So that’s the big picture. When it comes to our personal decisions, I agree, we’ve got to tune out some of the big-picture stuff and focus more on how saving and compound interest can make our own financial situations more secure.

Jim N. | June 18, 2014 6:59 am

Our schools are teaching our students to “spend spend spend”? I never had a teacher or professor preach that philosophy to me. Politicians, business persons, and society in general push the “importance” of consuming and we’ve even had a president who in essence told us it was our patriotic duty to shop, but I was never urged to consume by anyone in a school.

Anyway, a succinct bit of advice, Andy. My dad always tried to teach me two things when it came to planning for retiring: (1) Believe in the U.S.A. and (2) Save as much as you can afford to each and every month.

Eric D. | October 16, 2014 2:03 pm

Advice 1 is short sighted because a considerable amount of growth occurs outside of the US. So investing internationally would be wise as well.

David P. | July 1, 2014 11:41 am

“rising home equity stimulates the economy”
and overzealous government activity towards that end in destructive of the economy
people who grow debt vs. those who grow their capital-part of a “loser’s’ game”?

The student loan debt explosion-is it a way for educational institutions to swim in plenty?Raising their prices to new heights? But at the expense of someone?

Vijay S. | August 19, 2014 7:06 pm

Interesting debate indeed. While indeed the economy is propelled by spending, spending what you don’t have creates a crisis eventually not only for individuals for the nation as well. My East Indian parents always exhorted_ “Spend for your need, not for your greed.” But that is not the American way, I guess?
Thanks Andy.

Cary S. | June 5, 2014 3:50 pm

Thanks for re-iterating this boring, not sexy, most powerful way to achieve wealth and financial ease. Now I need to read the book about Warren Buffet so I can talk myself out of future unnecessary furniture purchases!

Susan T. | June 5, 2014 3:37 pm

We started a passbook savings at the corner Bank of America for my daughter when she was in middle school. I thought it would be a learning experience for her. The money sat there from 1992-2005, a time when the market did quite well. Fifteen years later, it was worth less than she put in, due to bank fees, which were surprisingly high for a student account.
A more sophisticated lesson was learned–be careful where you put your money.

Bruce W. | June 19, 2014 10:02 am

Unfortunately, this is a case of “going broke slowly” for the sake of “security”. Almost all investment studies show that investing some in the market, especially through a balanced and well diversified plan, will oversome the market risks in the long term, and preclude the effects of inflation. Further, As Ibbotson and other studieas have shown, over 90% of the success of a portfoilo is due to its asset allocation, not which specific funds it owns.

Laura F. | June 5, 2014 3:00 pm

I love this advice! It is so important to teach the “YOLO” generation to save. When my daughter was in college she had a part time job. We paid all her expenses yet I still wanted to encourage her to save. I told her as her graduation gift, I would match whatever money she saved while she was in school. I had no idea how seriously she would take my offer but she sure did! I had to come up with nearly $3,000 for her and did it very happily! Even more than that, she tells me she is still a saver almost 9 years later. Great way for her to start her adult life I’d say.

Heather J. | June 5, 2014 2:22 pm

Encouraging children and teenagers to save is the best habit you can give them to ensure future financial success.

I loved my passbook savings account, started when I was eight. Watching the balance grow fascinated me. My great grandfather gave me three shares of American Home Products when I opened my savings account in 1978 to expand my financial education.

I read the annual report, watched the stock prices in the newspaper and deposited my dividends into my savings account. It made me a comfortable investor as an adult, since I knew how share prices and the market flucuates.

William R. | June 17, 2014 1:24 pm

I agree with all the comments about starting savings early. However, did you know that a healthy couple 65 years of age has a time frame of 20 or more years? For long term growth we have part of our portfolio in brand name stocks that have a history of increasing dividends in good years and bad. These dividends are automatically reinvested in the same stocks. Examples are KO, JNJ, P&G, KMB. All but Coca Cola are poised to service BOTH the aging boomers AND the youngsters. Diapers aren’t just for infants anymore!

Ching-Chang T. | June 5, 2014 2:21 pm

This is one of the most honest and decent suggestions that I have ever heard. In a consumption driven society, we are told to spending money to help our economy. I do not agree with in the beginning. Now your advice helps me further to firm my belief that saving is one of the methods to accumulate wealth and protect comfortable retirement. Thanks.

Roy S. | May 28, 2014 9:37 pm

Great post Mr. Clarke. “Savings” seem so mundane, yet necessary. You have to have a goal to really get excited about ‘saving money.’ For many in my “Boomer Generation” what seemed to get us excited in the mid 1980’s was when it became apparent that corporate retirement plans were being replaced by the now ubiquitous 401-K. Strange, that about that same time life insurance salesmen were peddling ‘annuities’ as well, at least in our hood. We both came to the realization, if we were to have a retirement outside of social security, or perhaps a small company pension, we had to make it ourselves. An annuity seemed like a bad idea to us, but diversified equities, and bonds did not.
We were both fortunate to work for employers that offered low cost index funds, a company match, and later we both opened investment ROTH accounts at Vanguard. We fortunately, put enough away, and started early enough that today, we think we are comfortable embarking on that retirement road. Since retirement, we have rolled those 401’s to Vanguard. (We’re both 62) The great unknown is – how long are you going to be here on this gas bag?
After reading up on investing, and our experiences with low cost index funds, as well as low cost managed funds, that’s why we are Vanguarding!! Thank You!

Paul D. | May 27, 2014 2:02 pm

Excellent posting Andy!
“Saving” is vastly underrated in my humble opinion. Prior to my retiring, many of my younger co-workers would ask me “Will you teach me to invest like you?” To which I always replied “No, but I will teach you to save, because that is where you should really start.” Somehow, this idea of saving was not looked upon as being quite as ‘sexy’ or ‘cool’ as investing by most of these young folk. When I’d ask, “Well, how do you plan on coming up with your ‘seed-money’ to invest if you don’t have it now?”, I’d get some pretty blank stares.

I brown bagged lunch 4-5 times a week for nearly 20 years yet these same youngsters though nothing of spending $4-$5 a day on burgers or such. I told them that brown-bagging lunch was the easiest way to save $20 to $25 a week relatively painlessly…but that recommendation was not well received.

I have been very lucky in many aspects of my life. Saving as much as I can is one subject I don’t put under ‘lucky’ but instead under ‘discipline’. Saving is probably the one area of my life I can actually say that I really do have control over. Investing involves risk, taxes, complicated and not so complicated schemes, but saving is really very simple….spend less and the money you keep, is yours to keep.

Thanks for your comment, Paul. Yes, you sometimes see a look of disbelief (or disappointment?) when you explain that reaching a financial goal depends more on basic saving habits—like brown bagging—than financial wizardry.

Phil H. | May 22, 2014 12:01 pm

Well said and worth repeating! I have always felt that I was “saving for retirement, not investing for retirement”. Investing involves risk and there is no risk that we won’t retire! Save all you can, because you will either “need it all” and/or “you will be in position to help others along their way”. A well managed balanced mutual fund is as “wild” as I get. Wellington and Wellesley have served me well over the years, as have short-term bond funds. There are just too many articles about how to beat the market and/or get rich quick. We need more articles like this to truly understand “what we are doing about our personal financial management. Phil H.

Anonymous C. | June 30, 2014 12:16 pm

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At Vanguard, we’ve always believed in candid, direct communication with investors. In fact, it’s one of our core principles. In 2009, we created the Vanguard Blog so that we could talk about what’s happening in our industry and in the economy—and hear what’s on the minds of investors like you. More

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Visit vanguard.com or contact your broker to obtain a Vanguard ETF or fund prospectus which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in Creation Unit aggregations. Instead, investors must buy or sell Vanguard ETF Shares in the secondary market with the assistance of a stockbroker. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss in a declining market.

Stocks of companies in emerging markets are generally more risky than stocks of companies in developed countries.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.

All investing is subject to risk, including possible loss of principal.